Washington Apple Company (WAC) can either use labor or a combination of labor an

Question

Washington Apple Company (WAC) can either use labor or a combination of labor and machines to pick apples. Labor can be hired very cheaply-the going wage rate is $8 per hour, while the cost of using a machine (including depreciation, gasoline, maintenance, etc.) is $30 per hour. The manager of WAC is currently using only labor to pick apples, reasoning that labor is cheaper in dollars per day than the machine. In the present situation, the marginal product of an additional unit of labor is 4 bushels of apples per hour, while the additional product contributed by an apple-picking machine is 40 bushels per hour. You are hired as an economist by the firm manager as a consultant to advise her on whether to purchase such a machine

A.What recommendation do you make? Justify your answer.

B. Would your recommendation change if the cost of using the machine increases to $40 per hour?To $50? Explain your answer.

What equations would I use?

Explanation / Answer

a)Marginal cost/bushel=(Cost/hr)/(bushels/hr)

Marginal cost/bushel with manual labour=$8/4=$2/bushel

Marginal cost/bushel for machine=$30/40=$0.75/bushel

Clearly, the marginal cost/ bushel for the machine is lower and therefore purchasing a machine is recommended.

b)Marginal cost/bushel for machine at $40/hr=$40/40=$1 /bushel

Marginal cost/bushel for machine at $50/hr=$50/40=$1.25 /bushel

Since in both cases, the marginal cost/bushel is lower than manual labour, purchasing the machine is recommended in both cases.

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